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Summary:

Blockbuster’s Chapter 11 filing marks the end of an era, in which it dominated the home entertainment space with thousands of local stores throughout the U.S. But bankruptcy was a long time coming, as the convenience of online video ultimately trumped Blockbuster’s DVD selection.

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Blockbuster filed for Chapter 11 bankruptcy protection this morning, as part of a pre-arranged recapitalization that it has negotiated with its bondholders. With the filing, Blockbuster has wiped out nearly $1 billion in debt and given most of its bondholders equity in the company instead. The filing marks the end of an era, in which Blockbuster dominated the home entertainment space with thousands of local stores throughout the U.S.

So how did it end up staggering toward bankruptcy?

For many Blockbuster watchers, the bankruptcy filing was a long time coming. Its biggest issue was an eye-popping $930 million in debt that the firm had amassed, which left it hamstrung as smaller, more nimble firms nipped at its heels. But Blockbuster’s bigger problem was a fundamental change in the way consumers viewed and consumed home entertainment.

Blockbuster’s early value proposition when it opened its first store 25 years ago was relatively revolutionary, as it provided consumers local access to thousands of movie titles all in one place. It was by no means the first video rental company, but it achieved scale in a way no one else did, using its vast reach to dominate the video rental landscape and drive hundreds of local mom-and-pop video stores out of business. For many, Blockbuster provided the convenience of a one-stop shop for nearly any video title one would hope to watch.

But over the years, viewers and viewing habits have changed in a way that made Blockbuster less relevant. It’s no longer enough to provide users with a way to get content from a store down the street; nowadays, they want access to that content in their living rooms. At first the mail, and then online video gave them that access.

Blockbuster has been reeling for years, in part because Netflix and Redbox provided a better value proposition for many users. With Netflix, users no longer had to leave the house to rent a movie, as it had DVDs literally delivered to them. On the other hand, Redbox kiosks in grocery stores did their part to whittle away at Blockbuster’s local market share as well. The trade-off was clear; while users wouldn’t have access to the thousands of titles they would get from a Blockbuster store, the price — just $1 a night — was right. The fact that Redbox kiosks were in places like Wal-mart and consumers didn’t have to drive to another store made its rentals a no-brainer.

But it was online video that provided the final blow. Netflix had been successful with its DVD-by-mail service, but never has it been more successful than with the expansion of its streaming video service. Over the past year alone, its subscriber numbers have grown more than 40 percent, driven primarily by users that have logged into its streaming service. Now, more than 60 percent of subscribers have streamed Netflix content to their PCs and other connected devices.

And it was that — the low-cost, instant access to video content — that really did Blockbuster in. It might have had a wider selection, but the convenience of choosing a movie to be streamed online or on VOD made it so that users no longer had to leave the house to be entertained. The rise of Netflix and other online video services on various connected devices — like TVs, Blu-ray players and game consoles that users already own — just made it that much easier to watch video without ever leaving the house.

Blockbuster is poised to leave bankruptcy protection a much leaner and more nimble organization. But its ability to compete in the long term will depend primarily on how close it can get to the consumer to provide its content. It’s no longer sufficient to provide a video service down the street when users could already get their content in the living room. Blockbuster’s future will depend primarily on how well is can leverage broadband, its relationship with distributors and maybe even its real estate in this brave new world.

Photo courtesy of Flickr user Andrew Levine.

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  1. The only thing that killed Blockbuster was Blockbuster. The only thing that is a surprise is that it took this long because they found some sucker banks to extend them credit when they had no actual plan to become solvent.

    Netflix started out mailing DVDs. They are now prepared for ALL of that revenue to disappear by focusing on the growth of their streaming business. They’ve evolved. Blockbuster hasn’t.

    Streaming is a technology. It didn’t kill Blockbuster. Blockbuster was in perfect position to capitalize on streaming and online video, but they couldn’t let go of their legacy business to embrace the future.

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  2. The entertainment industry is still in transition. However, different parts are in different stages of transition. What Ryan laid out in this article for Blockbuster could be said of porn five years ago. It too has gone through its own transitions and is trying to come to grips with its present reality. A reality I propose is what Hollywood will have to face soon.

    If you’re old enough, you will remember porn theaters. Movie theaters that only showed porn movies. When I joined the military in the early 80s, I was sent to Fairchild AFB by Spokane, Washington. A group of us airmen went to the porn theater in the city since it had made the local news as the only remaining porn theater in the city. The reason for the death of the others was video. Before I moved away from Spokane, that last porn theater also closed down. Video had won Spokane … on the porn front.

    The reason porn video won over porn theaters was because with porn video, you could watch it at home and not in public at a theater. A porn theater that was almost always run-down and seedy. Whose patrons you didn’t want to see or be seen by. And some of those patrons were really creepy. They literally wearing trench coats. No surprise then that porn video killed off the porn theater.

    And then porn video was killed by the internet. While renting a porn video was WAY better than going to a porn theater, you still had to physically go into the video store to rent it. Just like at the porn theater, no one wanted to be seen renting a porn video, especially women. Porn video opened up porn for women as it had never been open to them before. Women just didn’t go to porn theaters and ones I did see there in Spokane were obviously (and they made it very obvious for obvious reasons) were prostitutes. But physically going into the video store to rent a porn video still was a bridge too far for the vast majority of women. Instead they sent their boyfriends and husbands.

    Internet eliminated anyone finding out what porn you watched and who you were. Not only that but you were no longer limited by what the video store had. All fetishes … no matter how extreme … could serviced.

    But the internet was a double-edge sword for porn. It opened up a huge audience but also enabled people to download it for free. That is the problem the porn industry is trying to overcome now. How to profit off of free porn. And that is essentially what scares Hollywood. It is why Hollywood hates peer-to-peer networks. The internet doesn’t fit into the business model that Hollywood has been used for over a 100 years.

    However, there is hope for Hollywood. There might be a business model that can turn a profit with the free internet. And the people that might discover that business model are the porn industry. It would be in NewTeeVee’s best interest to always monitor the porn industry and how it handles the free internet. The porn industry cannot go around suing everyone like Hollywood is doing. Hollywood suing everyone for sharing their movies and TV shows gives Hollywood an excuse to not innovate. “We’ll just sue them into submission!” is their way of dealing with the free internet. The porn industry cannot because they know no politician will stand up for them (no matter how much they stuff their pockets full of campaign “contributions”) so they have to figure out how to monetize the free internet. They are possibly the prime ones to watch for this innovation.

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  3. There are many factors and dynamics at play and multiple competing forces and all a moving target. There is no one big reason that rules them all. But you guys consistently forget about one big thing…

    Brick and mortar video stores, music stores and book stores all have one thing in common… it just gets harder and harder to be profitable when the amount of offerings continues to expand exponentially and you’re forced to guess what subset of all that choice is going to work best and constantly stock and restock your store. I took 10 years off from computer design and worked in that industry, in a brick and mortar setting.

    Borders and Barnes & Noble is a sea of books, Tower Records was a sea of music, and Blockbuster and Hollywood Video was a sea of movies, and only a fraction of that was ever sold (or rented). Even though you can return unsold product, shipping costs have increased as well.

    And when you have the online store that can instantly locate and deliver books, music and video, and find and deliver rare stuff, from sources which stock EVERYTHING THAT EVER EXISTED, there’s no way to compete.

    The brick and mortar versions of content delivery are dying if not dead. It’s an important part of this discussion that keeps getting forgotten. Brick and mortar cannot handle the expanding choice and increasing convenience of digital. It’s done.

    Fixed brick and mortar. Exponentially expanding choice. Fractional profitability.

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  4. The King is dead.
    Long live the King.

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  5. How about poor management? Did Blockbuster ever respond effectively to the Netflix threat? Clearly not. The threat was clear from day 1. In the end it is your management team that sets your strategy and in this case Blockbuster totally failed to respond to market conditions quickly and effectively when Netflix appeared on the landscape.

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  6. [...] news that Blockbuster is filing for bankruptcy should surprise no one, both because its financial problems have been common knowledge for a [...]

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  7. I don’t see why they didn’t do what was obviously needed to be done.

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  8. [...] 2010, in future years, will be looked on as a major turning point in home entertainment, but the collapse of Blockbuster and its descent into bankruptcy symbolizes how new distribution platforms have irreparably altered the way we consume [...]

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